German government bonds fell as minutes of the Federal Reserve’s October policy meeting showed the U.S. central bank may taper its $85 billion in monthly asset purchases “in coming months” if the economy improves.
Ten-year bund yields yesterday closed at an almost two-week high as an industry report showed business confidence in Europe’s largest economy increased to the highest level in more than a year in November, while manufacturing and services output in the euro area expanded for a fifth month. Fed Bank of St. Louis President James Bullard said on Nov. 20 a cutback in the central bank’s stimulus program is “on the table” for the December meeting.
“It’s a U.S. story,” said Lyn Graham-Taylor, a fixed-income strategist at Rabobank International in London. “The minutes were interpreted as a bit hawkish and these came on the heels of Bullard’s own hawkish words. The Ifo was quite good, which has also helped drive the move” in bonds.
Germany’s 10-year yield rose four basis points, or 0.04 percentage point, this week to 1.75 percent at 5 p.m. London time yesterday. That’s the highest close since Nov. 12. The 2 percent bund due in August 2023 dropped 0.37, or 3.70 euros per 1,000-euro ($1,355) face amount, to 102.245.
U.S. policy makers “generally expected that the data would prove consistent with the committee’s outlook for ongoing improvement in labor market conditions and would thus warrant trimming the pace of purchases in coming months,” according to the record of the Federal Open Market Committee’s Oct. 29-30 gathering, released Nov. 20 in Washington. The Fed next meets on Dec. 17-18.
The Ifo institute’s business climate index, based on a survey of 7,000 executives, rose to the highest since April 2012, and a separate gauge showed euro-region manufacturing and services output, based on a survey of purchasing managers, expanded in November.
The extra yield investors demand to hold Italy’s bonds over the benchmark German securities narrowed in the week after the Rome-based Treasury canceled debt auctions planned for Nov. 26 and Dec. 12, citing reduced funding needs.
Italian 10-year yields were little changed at 4.08 percent, leaving the spread over similar-maturity German bunds five basis points narrower at 233 basis points. The yield on 10-year Spanish (GSPG10YR) bonds rose four basis points to 4.10 percent.
Inflation (ECCPEST) in the euro-region quickened to 0.8 percent this month, from a four-year low of 0.7 percent in October, the European Union’s statistics office in Luxembourg will say on Nov. 29, according to the median estimate of economists in a Bloomberg survey. Germany is scheduled to sell 4 billion euros of 10-year bunds on Nov. 27. The Netherlands and Italy will also auction debt.
German government bonds handed investors a loss of 1.3 percent this year through Nov. 21, according to Bloomberg World Bond Indexes. Spain’s returned 11 percent and Italy’s earned 7.3 percent.